Argan, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2021 (the first quarter of Argan’s fiscal 2022). Unless otherwise noted, financial amounts are in U.S. dollars.
Business context
Argan provides engineering, procurement and construction and related services through its power industry, industrial fabrication and field services, and telecommunications infrastructure segments. The quarter’s results were led by construction activity at the Guernsey Power Station, with a substantial share of revenue coming from one customer.
Financial performance and liquidity
| Metric | Three months ended April 30, 2021 | Prior-year period |
|---|---|---|
| Revenue | $126.3 million | $60.1 million |
| Gross profit / margin | $23.7 million / 18.8% | $4.0 million / 6.7% |
| Operating income (loss) | $13.8 million | $(6.3) million |
| Net income (loss) attributable to Argan stockholders | $10.8 million; diluted EPS $0.67 | $(0.8) million; diluted EPS $(0.05) |
| Cash provided by operating activities | $17.3 million | $40.2 million |
| EBITDA, as reported by the company (non-GAAP) | $15.6 million | $(4.1) million |
Power segment revenue was $97.2 million, industrial services revenue $26.7 million, and telecommunications revenue $2.5 million. The Guernsey project represented 67.8% of consolidated revenue. The prior-year gross margin was depressed in part by a $2.7 million additional estimated loss on the TeesREP project. The 2021 quarter also included $0.7 million of net UK research and development credit income.
Cash and cash equivalents were $396.7 million at April 30, 2021, and short-term investments were $70.1 million. Working capital was $276.0 million. Operating cash flow fell year over year, with contract liability growth providing $27.5 million while reductions in accounts payable and accrued expenses used $21.6 million. The company paid $3.9 million in dividends and invested $3.5 million in a solar energy fund. The quarterly dividend was $0.25 per share.
Argan had no borrowings outstanding. Its amended revolving credit facility provides a $50 million commitment, with a conditional $10 million accordion, and expires May 31, 2024. The borrowing rate was reduced to 30-day LIBOR plus 1.6%; the company reported covenant compliance. Management believes available liquidity and expected operating cash flows are adequate for foreseeable general business needs.
Material changes and outlook
- Revenue more than doubled year over year, primarily as Guernsey reached peak construction activity. Industrial services revenue increased 173.6%, reflecting stronger field services and fabrication activity.
- Power segment backlog was approximately $0.7 billion at April 30, down from approximately $0.8 billion at January 31, 2021. Company-wide remaining unsatisfied performance obligations were $478.7 million; management estimated about 58% would be recognized in the remaining three quarters of fiscal 2022. These estimates may be affected by delays, cancellations, scope changes and cost revisions.
- Management said construction starts on certain awarded gas-fired power projects remain subject to financing, capacity-market uncertainty, permitting and public opposition. It was cautiously optimistic that the Harrison and Killingly projects could start before the end of fiscal 2022, but said timing could not be predicted with certainty. In May 2021, after quarter-end, GPS announced the Maple Hill Solar EPC contract, with immediate notice to proceed and completion scheduled for the second half of 2022.
- Management cited renewable energy growth, climate policies, natural gas and power prices, financing availability, project delays and commodity cost volatility as factors that could affect future opportunities and margins. Fixed-price contracts expose the company to cost overruns; management said active-job profitability had not been meaningfully harmed by the recent construction-material price surge through the period discussed.
- No specific consolidated revenue or earnings guidance was provided. Management estimated a 25.1% fiscal 2022 annual effective tax rate before discrete items.
Risks, contingencies and unusual items
- Customer concentration: One power customer accounted for 68% of quarterly revenue. Two customers each represented 23% of accounts receivable at April 30, and one customer represented 65% of contract assets.
- Exelon dispute: $24.5 million of billed receivables and unbilled costs related to a former customer depended on resolution of litigation. Discovery was closed; mediation was scheduled for September 2021, and no trial date had been set.
- Tax uncertainty: The IRS disputed significant portions of research and development credits claimed for fiscal 2016 and 2017; the company had protested the findings and expected to pursue appeals. The company carried $5.0 million of unrecognized tax benefits. It also reported approximately $26.9 million of income tax refunds and prepaid taxes in other current assets.
- Project and performance exposure: Unsatisfied bonded performance obligations were approximately $372 million; potential payments above estimated costs to complete current contracts were not estimable. The Chickahominy project’s construction start remained uncertain, and recovery of the company’s VIE project-development investment depends on successful development and financing.
- TeesREP: The final loss on the fixed-price portion was reduced to $29.5 million after negotiated changes. APC completed on-site work and was pursuing closeout and remaining contractual matters; final adjustments could still occur.
Important facts for investors to verify
- Whether Guernsey’s construction progress, project margins and customer concentration remain consistent with expectations.
- Conversion of backlog and RUPO into revenue, including timing of the Harrison and Killingly project starts and the contribution from Maple Hill Solar.
- Collection and legal resolution of the $24.5 million Exelon-related balance, and any resulting financial statement effects.
- Outcome and timing of the IRS research-credit dispute, including possible changes to tax liabilities or expected refunds.
- Cash generation and working-capital movements, as quarterly operating cash flow declined despite higher earnings.
- Potential exposure from fixed-price project costs, performance bonds, contract changes and project delays or cancellations.